IRS delays tax withholding

May 9, 2011
Washington Business Journal
Jill R. Aitoro

Bowing to pressure from both President Barack Obama and industry, the Internal Revenue Service delayed the start of an unpopular rule that would require federal agencies to withhold 3 percent of payments to contractors for taxes.

The rule, which will now go into effect one year later than planned on Dec. 31, 2012, has been a hot button topic for industry since Congress first created the requirement in 2006.

“We welcome the government’s decision to delay the implementation of this ill-conceived regulation," said Roger Jordan, vice president of government relations with the Professional Services Council, an industry group based in Arlington. "However, simply delaying the implementation ignores the fact that the requirement itself is bad policy and that full repeal is what is really needed."

The provision was designed by Congress to make it more difficult for contractors to avoid paying income taxes, after a 2004 Government Accountability Office report found that — as of Sept. 30, 2002 — more than 27,000 defense contractors owed about $3 billion in unpaid taxes. The 3 percent withholding would supposedly raise an estimated $7 billion by 2015.

However, contractors big and small argue that the impact on a company's cash flow could make day-to-day operations difficult, especially during a down economy. In November, a coalition of 113 associations that represent the contracting community urged Congress to delay implementation of the law by two years, in hopes of biding themselves more time to get it repealed, and in March, Obama called for a three-year delay.

"While it’s appropriate to focus on how to ensure that any tax liabilities government contractors and other organizations owe are properly collected, other regulations have been implemented in recent years that effectively ensure contractors are meeting their tax obligations," Jordan said, including requirements for contracting officers and grant officials to verify prospective contractors legal compliance with tax laws, and contractors to certify that they have no delinquent federal taxes.

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